Some are sitting duck – target practice..
The ATO likes to zero in on some segments sometimes. When they do they are lethal. They are not staffed enough to watch everyone. So, the generic stuff is a bit of a crap shoot. But they can seek and destroy effectively when they have a proper target. Niched down. The hunter, you, become the hunted – when it comes to property. The ATO then zeroes in with devastating accuracy. It’s the stuff of nightmares. Here’s one of those areas.
Flipping around
You might have come across the term ‘flipping.’ But do you know what it really means in the context of property? Why the Australian Taxation Office is keeping an eye on it? Property flipping is a strategy in real estate where you buy a property with the intention of selling it quickly for a profit, rather than using it for yourself. However, it’s important to note that even if you live in the property, you can’t escape taxes when flipping it.
Some folks believe they can move into a property, give it a makeover, and then sell it without worrying about taxes. Unfortunately, the tax law doesn’t grant you a free pass on this just because it’s your primary residence. The main residence exemption, which typically shields your family home from taxes, doesn’t apply if your main goal is to flip the property for a profit. So, even if you’re residing in the property, it doesn’t mean you’re in the clear when it comes to taxes.
The ATO is always watching
Some of you might be wondering, “Who’s going to find out, and how can the Australian Taxation Office (ATO) really determine my intentions when I purchase a property to live in?” In general, the ATO looks for certain indicators or declarations of intent. For instance:
If you’re not employed and your income primarily comes from moving in, renovating, and selling properties.
If you have a track record of renovating and selling properties.
If the loan documents for your mortgage suggest that the property is intended for flipping rather than long-term ownership.
If you publicly declare on national television that your plan is to move in, renovate, and flip the property (hello, contestants of The Block).
Tax guidelines
The ATO’s guidelines on property are pretty clear: “If you’re engaged in a profit-making activity like property renovations, also known as ‘property flipping,’ you should report the net profit or loss from the renovation in your income tax return. This includes the proceeds from the sale of the property minus the purchase and other costs associated with buying, holding, renovating, and selling it.” So, it’s important to be aware of the ATO’s criteria and reporting requirements if you’re involved in property flipping.
Many people assume that any profit from property flipping will be tax-free as long as the property serves as their primary residence throughout the entire ownership period. However, this exemption only applies when the property is held as a capital asset. Generally, a property is considered a capital asset if it’s purchased with a genuine intent to use it as a private residence or rental property for the foreseeable future, and there’s evidence to support this intention.
Can you “main-residence” your way out of this?
The Australian Taxation Office (ATO) makes it clear that individuals who renovate a property with the purpose of selling it for a profit could be subject to taxation on revenue account. In such cases, the main residence exemption does not apply.
The guide outlines three primary scenarios along with their general tax implications:
Personal Property Investor: This refers to someone who initially buys a property with the primary intention of using it as a long-term rental property or private residence. If this individual decides to undertake renovations and then sells the property sooner than originally planned, they should generally be able to argue that the sale falls under capital account treatment. This means they may be eligible for the main residence exemption and/or Capital Gains Tax (CGT) discount.
Isolated Profit-Making Undertaking: This category includes individuals who purchase a property with the primary purpose of renovating it and selling it once the renovations are completed. Those falling into this category are likely to be taxed on revenue account, and they typically do not have access to the main residence exemption or CGT discount.
Business of Renovating Properties: This pertains to individuals who engage in property-flipping activities on a regular or repetitive basis and organize these activities in a business-like manner. Similar to the previous category, there is generally no access to the main residence exemption or CGT discount for those in this category.
Living in the property for all or part of the ownership period doesn’t automatically exempt the profits from taxation. The main residence exemption can only reduce capital gains; it doesn’t apply to amounts taxed on revenue account.
We have a team of specialized tax accountants in Melbourne who can provide tax advice on all property-related matters. Get in touch with us today. You need to avoid drawing unwanted attention from the tax office. It’s not worth it.
The ATO is watching. Time to ninja your way out of this.